The prolonged slowdown and rural distress from low commodity prices was a significant factor behind the BJP-led alliance’s defeat in the 2004 general election.

We always overreact to crises in the West. Thus, when Lehman Brothers went belly-up in September 2008, freezing credit markets worldwide and sparking the Great Recession, our policymakers responded with a massive fiscal stimulus. Between 2007-08 and 2009-10, the combined gross fiscal deficit of the Centre and the states rose from 4 to 9.3 per cent of the GDP. This, despite the “global” financial crisis being largely centred round the US and Europe, while unleashing no major economic calamity in India.

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Yes, GDP growth slowed down to 6.7 per cent in 2008-09 from 9.3 per cent the previous year. Also, capacity-utilisation data from the RBI’s quarterly surveys of manufacturing companies revealed a decline from 75.9 per cent in July-September to 69.8 per cent in October-December 2008. But the very fact that capacity utilisation rebounded to 75.9 per cent by July-September 2009 and GDP growth, too, recovered to 8.6 per cent in 2009-10 showed this was only a temporary phenomenon, making the fiscal stimulus quite unnecessary. Indian industry was, at that time, still riding the crest of the business cycle, with Lehman Brothers only momentarily dampening its animal spirits.

The same overreaction has characterised our responses to the Greek debt crisis or the US Federal Reserve tapering its unprecedented bond-buying (quantitative easing, QE) programme and, more recently, embarking on raising interest rates. True, these do impact foreign portfolio investment flows that also have a bearing on the rupee. But we know very well that the capital outflows India experienced during the first half of 2013-14 had less to do with “taper tantrums” as much as our own issues of “twin deficits”, which were actually a byproduct of the earlier excessive fiscal stimulus. The renewed outflows taking place now are also clearly linked mainly to the slowdown in China than the prospect of the Fed hiking interest rates. And unlike in July-August 2013, it is other emerging market economies (EMEs), not India, which are facing the maximum heat.

That brings us to the main point: The obsession with crises in the West makes us oblivious to problems in the EMEs, which arguably have more long-lasting effects on our economy. We forget what the 1997 Asian financial crisis did to us. It began as a collapse of the baht, after speculative attacks that forced the Thai government to float the currency on July 2, and very soon spread to Indonesia, South Korea, the Philippines and Malaysia. By 1998, the sharp reduction in oil and commodity prices this engendered had also contributed to crises in Russia, Brazil and Argentina, leading to steep devaluations of their currencies and even defaults on sovereign debt.

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The “Asian flu” basically did three things: First, it triggered tit-for-tat currency devaluations among the EMEs that saw this as the only way to retain export competitiveness. Second, these were accompanied
by falling commodity prices — spot Brent Crude plunged below $10 per barrel in December 1998. Third, the combination of devalued currencies and lower global commodity prices resulted in countries “importing” deflation.

Now, how did all this play out in India? During 1994-95 to 1996-97, the country’s GDP grew by 7.2 per cent a year. But in the subsequent six-year period, the average annual growth was just 5.4 per cent. Moreover, inflation based on the GDP deflator averaged a mere 4.7 per cent per year from 1997-98 to 2002-03, while being even lower, at 4.4 per cent, for farm produce.

Simply put, the Asian crisis produced a slowdown, whose effects, both in terms of low growth rates and depressed prices for producers, lasted well into 2002. GDP growth did revive to 8 per cent in 2003-04, but it was too late by then for the ruling NDA. The prolonged slowdown and rural distress from low commodity prices was a significant factor behind the BJP-led alliance’s defeat in the 2004 general election. What followed, of course, was an extended period of growth, averaging 7.6 per cent between 2003-04 and 2013-14.

The fruits of it were, however, largely reaped by the UPA, notwithstanding the slowdown that set in during the last two years of its rule (which didn’t help the Congress in the 2014 polls). This growth was underpinned no less by the global commodity boom, benefiting the EMEs in general and Indian farmers, too — the annual average inflation in agricultural produce, at 9 per cent, was more than the overall rate of 6.5 per cent for the 11-year period.

What we are now witnessing is a crisis similar to that in 1997, again centred around the EMEs rather than the West. Although China may have many more reserves than what Thailand had in 1997 to defend its currency against short-sellers — think George Soros — its ability to rattle commodity markets, too, is far greater. That is natural, given the country’s 40-50 per cent share of global consumption, be it for iron ore, coal, lead, zinc, nickel or aluminium. Not too long ago, China’s steel mills and base metal smelters were gobbling up much of the world’s industrial raw materials to cater to its own breakneck pace of infrastructure and housing construction. Today, these same factories are saddled with excess capacity in the face of domestic demand growth stalling. China seeking to export its way out of a slowdown now has, in turn, become the cause of imported deflation for others, including India.

To be sure, the warning signals of a commodity collapse were there even earlier, when the current NDA government under Narendra Modi came to power. As before, policymakers were slow to recognise the implications of the crash in global prices of corn, sugar, cotton or rubber for the country’s farmers and overall rural purchasing power. Right through 2014 and much of 2015, our attention was riveted on troubles in the eurozone and the Fed’s monetary policy moves. Adding to the complacency was the new GDP computation methodology from the Central Statistics Office, throwing up growth numbers not many — apparently even RBI Governor Raghuram Rajan or Chief Economic Advisor Arvind Subramanian — take very seriously.

It is only when domestic steel- and aluminium-makers started crying hoarse about alleged Chinese dumping — and the Sensex, too, began sliding towards the latter part of last year — that wisdom finally dawned on our policymakers. The biggest lesson to be learnt from the 1997 Asian financial crisis is never to underestimate the troubles emanating from the EMEs. It took five years or more for India to emerge from that crisis.

The current crisis, in all probability, is still to fully unfold. Not acting decisively now could well mean a recovery not happening before 2018. And that, going by the previous NDA regime’s bitter experience, may not be too electorally useful.